New EITC Study for Puerto Rico

Posted July 5, 2018

The Earned Income Tax Credit is a program that rewards low income working families for staying employed. This program has proved effective in lifting families out of poverty. The funds it provides are used for college tuition, car repairs, and other expenses that can help poor households increase their income and make their jobs more reliable.

The federal EITC is not available in Puerto Rico, though the Economic Task Force recommended that the credit be extended to Puerto Rico. A new study commissioned by Espacios Abiertos examines the potential of a renewed local EITC in Puerto Rico.

Between 2006 and 2014, there was a local EITC in place. Both the New Fiscal Plan presented by the Puerto Rican government and the plan certified by the FOMB on May 30, 2018, propose to create a new version of this law. The credit would begin in January, 2019.

A small credit that goes to a wide range of people turns out to be less effective than a larger credit with fewer beneficiaries. The federal EITC has the advantage of providing enough funds to working families to offset the costs associated with struggling to work in low-paying jobs. While statistics suggest that people who accept and keep any job can expect to work their way out of poverty, the reality is often more complex. For many low-income people, a broken down car or an increase in day care costs can make it impossible to attend work regularly. Losing a job then makes it harder to get a new job, and the downward spiral continues. Recipients of the federal EITC, research shows, have been able to break that cycle. A larger local EITC for fewer people could have the same results in Puerto Rico.

To reduce the number of recipients, Enchautegui recommends implementing two requirements. First, the EITC should be for households with children under 17. Second, there should be a minimum household income. Families that earn money already, the thinking goes, are more likely to remain in the workforce than families which have been unable to bring in funds by working.

Benefits should be awarded to the entire household, not to an individual within the household. Under the previous local EITC, households often benefited from the EITC when they were not actually eligible. One member of the household might have been eligible, but as a family, the household was not.

Dr. Enchautegui cautioned that the projections for the Fiscal Plan are not realistic. They assume that the number of recipients of the local EITC would hold steady over time. In actuality, the number could be expected to increase as more people enter the workforce. She also emphasized that the previous local EITC, which changed the requirements for eligibility five times in seven years, was not stable. A situation like that can’t be expected to change people’s behaviors.

EA director Cecille Blondet said,“We have an opportunity here to do justice to workers with an incentive that has proven to be a very effective tool against poverty in the United States and other countries around the world. Our laws grant a wide range of credits and incentives to corporations, but few or none to low- or middle-income individuals. It’s time to refocus our fiscal policies to do justice to the individual, too, particularly those who due to adverse situations outside their control live under financial hardships.”

Extending the federal EITC to Puerto Rico has been proposed repeatedly. It would provide three times as much funding as the local initiative could.

Espacias Abiertos is an independent, nonpartisan, nonprofit organization that does not accept government funding. Their focus is on encouraging economic transparency in Puerto Rico.